Business Context and Reporting Period
Company: Compass Diversified Holdings (NYSE: CODI)
Filing Type: Form 8-K (Current Report)
Date of Report: August 6, 2014
Reporting Period: Second Quarter and Six Months ended June 30, 2014
Business Overview: CODI owns and manages a diverse family of North American middle-market businesses, including Advanced Circuits, American Furniture Manufacturing, Anodyne Medical Device, Arnold Magnetic Technologies, CamelBak, Ergobaby, and Liberty Safe. The company also holds a non-controlling interest in Fox Factory Holding Corp. (FOX).
Key Financial Metrics
| Metric | Q2 2014 | Q2 2013 | 6 Months 2014 | 6 Months 2013 |
|---|---|---|---|---|
| Net Sales | $269.1 million | $245.8 million | $515.1 million | $487.3 million |
| Net Income | $12.3 million | $2.0 million | $19.7 million | $5.6 million |
| Cash Flow Available for Distribution (CAD) | $12.5 million | $23.5 million | $27.1 million | $44.3 million |
| Distribution per Share | $0.36 | $0.36 | $0.72 | $0.72 |
| Cash and Equivalents (as of 6/30/14) | $115.3 million | |||
| Debt Outstanding (as of 6/30/14) | $325 million (Term Loan) + $45.4 million (FOX Term Loan) | |||
| Borrowing Availability | ~$388 million (Revolving Credit Facility) |
Material Changes vs. Prior Period
- Net Income Growth: Q2 2014 net income increased significantly to $12.3 million from $2.0 million in Q2 2013. This improvement is partially attributed to the absence of an $8.9 million non-cash Supplemental Put Agreement expense recorded in Q2 2013.
- Cash Flow Decline: Cash Flow Available for Distribution (CAD) decreased to $12.5 million in Q2 2014 from $23.5 million in Q2 2013. This decline was driven by a $1.6 million inventory charge at the Liberty Safe subsidiary and the exclusion of FOX subsidiary results following its IPO.
- Revenue Growth: Net sales increased 9.5% year-over-year in Q2 2014. Management highlighted double-digit revenue growth for Ergobaby, CamelBak, and American Furniture Manufacturing.
- Debt Restructuring: The company executed a new $725 million credit agreement ($400 million revolving, $325 million term loan) to replace previous facilities, enhancing financing flexibility.
Outlook, Commentary, and Risks
- FOX Divestiture: Subsequent to the quarter, CODI sold shares of FOX common stock, generating net proceeds of approximately $65.5 million. Ownership in FOX decreased from 53% to 41%. CODI expects to deconsolidate FOX from its financial reporting beginning in the quarter ending September 30, 2014.
- Management Commentary: CEO Alan Offenberg emphasized predictable free cash flow generation and the strategic use of liquidity to reinvest in subsidiaries and pursue accretive acquisitions.
- Unusual Items: A $1.6 million inventory charge was recorded at Liberty Safe due to reduced demand for import products. A $2.1 million loss on debt extinguishment was recorded in Q2 2014 related to the refinancing.
- Risks: Forward-looking statements are subject to uncertainties. The company notes that actual results may differ materially from projections due to factors enumerated in its Form 10-K.
Investor Verification Checklist
- FOX Deconsolidation Impact: Verify the timing and financial impact of deconsolidating FOX from the September 30, 2014 quarter results.
- CAD Sustainability: Assess the sustainability of Cash Flow Available for Distribution given the year-over-year decline and the exclusion of FOX results.
- Liberty Safe Performance: Monitor the Liberty Safe subsidiary for continued demand issues following the $1.6 million inventory charge.
- Debt Covenants and Maturities: Review the terms of the new $725 million credit facility and confirm the absence of significant debt maturities until 2019.
- Acquisition Pipeline: Evaluate management's ability to deploy the $388 million in borrowing availability and $115 million in cash for accretive acquisitions.